August 2, 2019 - Indonesia's thermal coal prices and production remained largely unaffected even as the country's anti-corruption watchdog investigates certain major coal producers for alleged tax avoidance, sources said Thursday.

The country's Corruption Eradication Commission, or KPK, has launched investigations into several Indonesian coal producers allegedly using the practice of "transfer pricing" to avoid tax liabilities, according to local media reports this week.

Transfer pricing is the price at which departments within a company transact with each other.

The reports added 51 coal contract mining holders were requested to submit coal sales documents between 2017 and 2019 for audit.

An East Kalimantan-based producer familiar with the matter said data submission for audit is currently ongoing.

A Singapore-based trader said the mining contract holders were mainly producing the Indonesian high calorific value thermal coal.

The coal reference price Harga Batubara Acuan -- which the Indonesian government sets each month to calculate royalty payments -- is based on an amalgamation of high CV coal prices, including S&P Global Platts price assessment, he added.

The HBA price for thermal coal is the basis for determining the prices of 77 Indonesian coal products and calculating the royalty producers have to pay for each metric ton of coal sold.

Tightening Grip

Despite ongoing investigations, sources noted that mining businesses are still in operation with no immediate impact on prices and production.

"There could be potential impact on prices but it will take some time," a source said.

"If KPK found a problem, the implication could be in the form of a penalty or even sanction," he added.

Some market players said that the country's authorities have been tightening their grip on the coal industry in a bid to keep production volumes in check.

"This is actually a good initiative for the industry, to put some pressure and push miners to be more disciplined," an Indonesia-based producer said.

"In the end, it's all about the revenue for the country," he said.

The recent move by authorities will likely "keep the house in order" and address the problem of overproduction by some miners, another Indonesian producer said.

"We do hope KPK will kill all [questionable] businesses and prices will rebound," he said.

Indonesia produced about 528 million mt of thermal coal in 2018, exceeding its initial target of 485 million mt. This year, the country is targeting a production of 490 million mt.

Earlier last month, authorities revoked producer Tanito Harum's Coal Contract of Work, or CCoW, mining license extension after KPK found that the contract extension was not in line with the mining law.

Seven major Indonesian thermal coal producers' CCoWs will expire in the next two years and the action against Tanito has stoked fears that these producers may face similar fate.

Indonesia's Ministry of Energy and Mineral Resources set its July thermal coal HBA reference price at $71.92/mt, down 11.7% on the month and 31.3% on the year.

The price of 5,900 kcal/kg GAR grade of Indonesian coal -- one among the four prices used in calculating the HBA -- was assessed Wednesday at $63.20/mt FOB Kalimantan, down about 7% from January 2, Platts data showed.